Europe and US have historic opportunity to form powerful bloc

Europe and the USA have the historic opportunity to form a powerful bloc

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Europe and the United States have a historic opportunity to form a super-bloc, aligning against Russia’s invasion of Ukraine,?significantly reducing trade dependence on China, and tackling global climate change.

Such a super-bloc would create a “Brussels Effect” on steroids, effectively setting standards for countries and corporates across the world.

The power of the idea is demonstrated in Ukraine, as Europe and the US have marshalled unprecedented aid and jointly isolated Moscow. Cooperation on?reducing China dependency is also encouraging, though admittedly a bit more mixed.

The record is more problematic on the energy transition, though. Policymakers need to double down on cooperation in this area or risk undermining the huge promise of the super-bloc.

Europe should recognise the moderate scope of IRA provisions

Despite global consensus on avoiding climate catastrophe, the US and EU are squabbling over energy policy. The immediate irritant is the Inflation Reduction Act.

The world should cheer this legislation: it has been?estimated?to reduce US annual greenhouse gas emissions by 1 billion metric tons in 2030, bringing emissions to 42 percent below 2005 levels by 2035 (relative to 27 percent below without the law).?

The requirements to be eligible for subsidies, however, should not have excluded Europe.?Those provisions are now enacted in law and given the partisan split in Congress, almost impossible to modify through new legislation.???

To dial down the noise, Europeans need to recognize the relatively modest impact of the relevant provisions and the US must give where it can. On EV battery subsidies, for instance, the IRA requires that 40 percent of the minerals in an EV battery come from the US or a Free Trade Agreement partner.?There is no such agreement between the EU and the US. That’s why as of today minerals sources or processed in the EU do not count towards EV battery subsidies. The US Treasury has outlined?a path to change that. While a broad free trade agreement would be too complex to negotiate, the idea is to sign a narrow agreement that solves the subsidy issue.?

The EU should also embark on its own program of companion subsidies and equivalent content requirements to alleviate competitive concerns.?As the new subsidies are debated, France and Germany have work to do in alleviating concerns among the other 25 EU members that the subsidies will benefit them also.?

The transatlantic agreement on green steel could be a model on trade issues

The next flashpoint will be the EU’s upcoming Carbon Border Adjustment Mechanism (CBAM). The CBAM imposes a carbon price on imports from countries lacking a sufficient domestic carbon price themselves. The US does not have a national carbon price, and we won’t in the foreseeable future.?

Slapping additional costs on U.S. exports through the CBAM may seem a tempting way to enact revenge for the Inflation Reduction Act, but such a tit-for-tat would be a mistake.?

A transatlantic agreement on green steel and aluminum offers some hope. Steel alone?accounts for 11 percent of global emissions. The US and EU?have pledged to align?on a shared calculation of embedded emissions for the CBAM tariffs, so we might avoid the imposition of EU duties on US steel exports.

That model could be extended to other high-intensity industries, including chemicals. Indeed, a “climate club” approach expanding the steel and aluminum scheme into a?global initiative, with the US and EU imposing coordinated tariffs in a variety of sectors, is a promising mechanism for the super-bloc to bend global emissions curves.?

The energy transition won’t happen overnight: carbon is too embedded in modern society for that to be realistic.?The extended timetable only underscores the benefits of joint action, however.?

Now is the time to avoid petty differences before we lock into bickering as the model for the energy transition.?It would be tragic indeed if the potential of a European-US super-bloc foundered on the shoals of the shared challenge around climate change.?

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The author:

Peter Orszag is Chief Executive Officer of Financial Advisory at Lazard. Prior to joining the financial industry, he had been member of the US Administration as Director of the Office of Management and Budget (OMB) in the Cabinet of President Barack Obama.

Op-ed originally published in Handelsblatt